At a conference at the end of September, the Federal Reserve Board’s Vice Chair, Lael Brainard, warned that there would be costly impacts because of global markets’ rapidly increasing rates. However, the dollar will likely make its fourth monthly gain of close to 10% this quarter.
Nevertheless, the belief that the Federal Reserve would continue to be active in fighting inflation even at the risk of a recession has helped to keep the dollar on course for its fourth monthly gain. The Fed pushed back any hawkish tilt that the markets were anticipating in the short term by raising interest rates by 75 basis points for a third consecutive meeting in September while predicting rates would peak at 4.6% next year with no reductions until 2024.
The dollar gained strength across the board, with buying activity against the British pound and the euro being some of the most evident due to rising economic and energy concerns.
US economic data was inconsistent, with analysts’ estimates of the second quarter’s GDP clocking in at -0.6%. Initial Jobless Claims for the week ending September 24 decreased by 193,000, according to data from the US Department of Labor, demonstrating the labour market’s resilience.
The US Bureau of Economic Analysis has since publicized the Personal Consumption Expenditures (PCE) Price Index data. On an annual basis, it was anticipated that PCE inflation would increase to 6.6%, and core PCE inflation, which excludes volatile energy and food prices, would increase to 4.7%.
The euro settled at $0.98, which came close to its 20-year low ($0.95) at the end of September. This is due to the Fed confirming it will continue with its monetary tightening path. Furthermore, the latest CPI numbers show the inflation rate for the Euro Area had topped 10% in September, which is a new all-time high. Investors are counting on the European Central Bank aggressively raise its interest rates.
Inflation rates in Spain and France slowed, but they stayed above the central bank’s 2% target, while Italy and Germany reached new records. The Europen Central Bank’s (ECB) President Christine Lagarde said they would continue raising interest rates to help tame inflation. However, the side effects can include weaker growth, and ECB members are calling for a 75 basis point hike in October.
In September, Euro Area annual inflation rate jumped 10% from August’s 9.1% and reached double digits. This would be the 5th month they have raised inflation with no sign of prices peaking. Tobacco, food, and alcohol showed faster increases. Germany recorded their highest inflation rates, with Italy following close behind them. Spain and France’s inflation rates slowed.
Soon after the government intervened in the currency markets for the first time since 1998 to stop yen depreciation, the Japanese yen dropped against the dollar, returning to its lowest levels in 24 years and forcing officials to issue new warnings against substantial yen declines.
In a news conference, Japanese Finance Minister Shunichi Suzuki said, “We are deeply concerned about recent rapid and one-sided moves driven in part by speculative trading.” He added, “There’s no change to our stance of being ready to respond as needed.”
The Bank of Japan (BOJ) chose to continue its low-interest rate policy in order to promote a fragile economic recovery, which caused more yen depreciation and widened the policy gap with the US. This led to the intervention. The overall dollar strength that resulted from the downfall of the pound sterling and the uncertainty about the state of the world economy also hurt the yen.
In a speech with business leaders in Osaka, BOJ’s Governor Haruhiko Kuroda stated that uncertainty regarding the country’s economic outlook is growing due to recent monetary tightening by major central banks that has slowed global growth.
In his speech, he said, “We must be mindful of the fact that downside risks are high.” He continued by saying that the central bank’s low monetary policy would continue to assist the economy.
Regarding pricing, Kuroda noted that Japan had been affected by global inflation. Instead of a boost in local demand, the country’s current price increases are likely due to high costs, primarily caused by high commodity prices and currency depreciation.
It is anticipated that starting in 2023, this upward price pressure from high costs will gradually lessen, barring a future increase in the price of international commodities. The governor commented on the weak yen by saying that wild swings in currency were undesirable because they would hurt the economy.
A strong US dollar, a hawkish US Federal Reserve, and growing concerns of a global recession all contributed to the New Zealand dollar holding around $0.575 at the end of September, close to its lowest levels since March 2020. Additionally, investors are getting ready for the Reserve Bank of New Zealand’s (RBNZ) policy meeting on October 5, when it is anticipated that it will increase its policy rate by 50 basis points to 3.5% in order to fight inflation.
The RBNZ has already increased interest rates seven times in a row and indicated that it wants to reach a cap of 4% before pausing, although markets anticipate a peak of over 4.75%.
NZ’s Deputy Prime Minister and Finance Minister, Grant Robertson, praised the nation’s economic strength and said in an interview with TVNZ, “The global economy is a tough place to be at the moment. There are still issues coming out of Europe, obviously with the war in Ukraine, issues in China.”
He further stated, “This is a difficult period, but we are looking to see inflation start to trend down from this quarter onwards.”
The dollar’s strength and high Treasury yields, combined with expectations that the US Federal Reserve will move forward with its aggressive plan to combat surging inflation, caused gold prices to stabilize at around $1,660 an ounce at the end of September. However, they were still declining for the sixth consecutive month. The metal is trading almost 20% below this year’s high and has lost nearly 3% in September.
Several Fed members reaffirmed the necessity for the central bank to raise interest rates to restraint levels in order to address ongoing inflationary pressures, even at the risk of some economic discomfort and instability in the financial markets. By raising the opportunity cost, higher interest rates make owning non-yielding bullion less desirable.
Since the US economy is stronger than other developed countries, investors have continued to favour the greenback over gold as a safe store of value during increased economic uncertainty.
As economic uncertainties increase, the US dollar is poised to benefit as an international safe haven. Due to the US central bank’s position as the global leader throughout this cycle of monetary tightening, the US dollar also enjoys a rate advantage.
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